Private electronic market


A private electronic market uses the Internet to connect a limited number or pre-qualified buyers or sellers in one market. PEMs are a hybrid between perfectly open markets and closed contract negotiations. The core idea of PEMs is to create competition among buyers/sellers while allowing buyers/sellers to adjust all those aspects of the deal that are typically only dealt with in a negotiation.
This creates a problem of "comparing apples and oranges": bids may be quite different in many dimensions and therefore cannot easily be compared. Apart from the dimension of price these could include pre-negotiated discounts, specific qualities, combinations of goods and services with conditional pricing, freight differentials, contract fulfillment timing, payment terms, or deliberate constraints such as market share limits.

Practical examples

, a government-owned agency in Australia, regularly invites a number of saw mills to bid for native timber supply via . The VicForests Private Electronic Market allows saw mills to specify exactly the volume they require, the quality, species, payment terms etc. Sawmills can also create conditional bids such as "if I win x and y I am willing to pay more". Further, market participants are factored e.g. based on transport costs. In effect, a saw mill that is further away will have to bid more than one that is close by. Similarly, a bid for one particular lot may be the highest but a bundle created by another participant may still win based on higher total revenue. Participants receive real-time feedback on where they stand with their current bids and are able to respond. Compared to the traditional sealed bid tender approach, VicForests' PEM resulted in a substantial revenue increase.

Relevance

The overall effect of a well designed Private Electronic Market is what is described as allocative efficiency or in simple terms: a win-win for the seller and buyers. PEMs are based on game theory and combinatorial auction theory.